Hospital Mergers and Economic Efficiency

Transcription

1 University of Florida Levin College of Law UF Law Scholarship Repository UF Law Faculty Publications Faculty Scholarship Hospital Mergers and Economic Efficiency Roger D. Blair University of Florida, Christine Piette Durrance D. Daniel Sokol University of Florida Levin College of Law, Follow this and additional works at: Part of the Antitrust and Trade Regulation Commons, and the Health Law and Policy Commons Recommended Citation Roger Blair, Christine Piette Durrance & D. Daniel Sokol, Hospital Mergers and Economic Efficiency, 91 Wash. L. Rev. 1 (2016), available at This Article is brought to you for free and open access by the Faculty Scholarship at UF Law Scholarship Repository. It has been accepted for inclusion in UF Law Faculty Publications by an authorized administrator of UF Law Scholarship Repository. For more information, please contact outler@law.ufl.edu.

2 HOSPITAL MERGERS AND ECONOMIC EFFICIENCY Roger D. Blair, * Christine Piette Durrance ** & D. Daniel Sokol *** Abstract: Consolidation via merger both from hospital-to-hospital mergers and from hospital acquisitions of physician groups is changing the competitive landscape of the provision of health care delivery in the United States. This Article undertakes a legal and economic examination of a recent Ninth Circuit case examining the hospital acquisition of a physician group. This Article explores the Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke s Health System, Ltd. (St. Luke s) decision proposing a type of analysis that the district court and Ninth Circuit should have undertaken and that we hope future courts undertake when analyzing mergers in the health care sector. First, the Article addresses the question of how best to frame the acquisition of a physician group by a hospital is the merger horizontal, vertical, or potentially both? In undertaking this analysis the Article examines the broader issue of the treatment of Accountable Care Organizations (ACOs) in antitrust law. ACOs are short of full integration and as such, a potential contractual alternative for hospitals and physician groups to an acquisition. A hospital acquisition of a physician practice also has implications for how to view competitive effects in the context of ACOs. Indeed, in St. Luke s the Ninth Circuit suggests that integration short of full merger was a possible alternative. Second, the Article examines the justification for integration as a way to address countervailing power in health care, the reduction of transaction costs, and potential cost and quality efficiencies. Third, the Article applies the economics of these issues to merger case law generally and specifically to the St. Luke s decision. Ultimately, the Article finds the economic analysis of the Ninth Circuit lacking. Finally, the Article offers policy implications of the decision and concludes with some suggestions to improve health care antitrust analysis in practice for litigated cases to make such analysis better follow economic principles. INTRODUCTION... 2 I. HOSPITAL ACQUISITIONS OF PHYSICIAN GROUPS: HORIZONTAL, VERTICAL, OR BOTH?... 6 A. Vertical Merger Law... 7 B. Implications of Vertical Merger Analysis on ACOs Vertical Integration Short of Mergers ACO Policy Statement a. ACO Policy Statement Background b. Antitrust Analysis of the ACO Policy Statement i. Research into ACOs Is Inconclusive * Professor of Economics, University of Florida. ** Associate Professor of Public Policy, University of North Carolina-Chapel Hill. *** Professor of Law, University of Florida Levin College of Law. We want to thank Josh Soven for his comments. 1

3 2 WASHINGTON LAW REVIEW [Vol. 91:1 ii. Policy Implications C. Recent Enforcement Trends D. Role of Transaction Cost Economics in Health Care Integration Basics of Transaction Cost Economics a. Search Costs b. Negotiation c. Reduced Flexibility Health Care and Transaction Cost Economics a. Reducing Health Care Costs via Integration b. Better Aligning Incentives c. Economies of Scale and Scope d. Managerial Diseconomies II. FORECLOSURE A. Foreclosure Claim B. Economic Rationale III. THE ECONOMICS OF THE HORIZONTAL CASE A. Countervailing Power in Health Care The Economics of Countervailing Power B. Role of Efficiencies C. Economics of Efficiency-Enhancing Mergers Cost-Based Efficiencies Efficiency-Enhancing Joint Ventures and Mergers Among Sellers Welfare Effects of Quality IV. THE LAW OF THE HORIZONTAL CASE A. Judicial History of Antitrust Mergers in Health Care Overview B. Case Law Treatment of Merger Efficiencies C. Hospital Merger Efficiencies An Assessment of the Cases D. Efficiencies in St. Luke s V. POLICY IMPLICATIONS AND CONCLUSION INTRODUCTION Case developments in recent years have renewed attention on the antitrust implications of health care mergers. This attention is particularly important given the current trend of government victories against merging parties in merger challenges. 1 The United States 1. Lisa Jose Fales & Paul Feinstein, How to Turn a Losing Streak into Wins: The FTC and

4 2016] HOSPITAL MERGERS 3 Supreme Court s 2013 decision in FTC v. Phoebe Putney Health System, Inc. 2 was the result of a successful challenge of the anti-competitive merger of two hospitals in Georgia that attempted to shield the merger via state action. 3 While the Supreme Court has not ruled in decades on the substantive aspects of antitrust mergers, two recent circuit court antitrust health care cases have received significant attention ProMedica Health System, Inc. v. FTC 4 in the Sixth Circuit and Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke s Health System, Ltd. 5 (St. Luke s) in the Ninth Circuit. Efficiencies, known in the business world as synergies, 6 play an important role in justifying mergers. By efficiencies, we mean decreases in price, increases in quality and/or output, or increases in innovation. 7 Because the ProMedica district court found no efficiencies in the transaction, that case is, from a doctrinal standpoint, less interesting than the St. Luke s decision in the Ninth Circuit that found both procompetitive (efficiencies) and anti-competitive (monopoly power) effects present in the merger. 8 The Ninth Circuit ultimately upheld the district court s decision to enjoin the merger. 9 In doing so, the Ninth Circuit had the opportunity to undertake a serious economic analysis of the merger and to clean up dated case law that has failed to incorporate rigorous economic analysis of efficiencies and other competitive effects. Unfortunately, irrespective of the outcome, the Ninth Circuit s analysis was lacking. A more rigorous analysis would have provided guidance to improve case law for future courts. It also would bring predictability to merger cases decided in the shadow of the law in terms of merger planning for hospital acquisitions of physician groups, hospitals acquisitions of other hospitals, and for negotiations between merging parties and antitrust enforcers more generally. The lack of economically Hospital Merger Enforcement, ANTITRUST, Fall 2014, at 31, FTC v. Phoebe Putney Health Sys., 133 S. Ct (2013). 3. Id. 4. ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559 (6th Cir. 2014). 5. Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke s Health Sys., Ltd. (St. Luke s), 778 F.3d 775 (9th Cir. 2015). 6. See, e.g., Michael Goold & Andrew Campbell, Desperately Seeking Synergy, HARV. BUS. REV., Sept. Oct. 1998, at 131, 143 ( When synergy is well managed, it can be a boon, creating additional value with existing resources. ). 7. Howard Shelanski, Efficiency Claims and Antitrust Enforcement, in 1 THE OXFORD HANDBOOK OF INTERNATIONAL ANTITRUST ECONOMICS 451, 451 (Roger D. Blair & D. Daniel Sokol eds., 2015). 8. St. Luke s, 778 F.3d at Id. at 793.

5 4 WASHINGTON LAW REVIEW [Vol. 91:1 informed case law in St. Luke s is a missed opportunity to clarify merger law in light of the Supreme Court s absence in merger case law development. 10 In the St. Luke s case, St. Luke s Health System (St. Luke s) sought to acquire the Saltzer Medical Group (Saltzer). 11 Saltzer was the largest independent multi-specialty physician group in Idaho. 12 St. Luke s already had integrated eight primary care physicians within its Nampa hospital system. 13 The combination of Saltzer s sixteen primary care physicians and St. Luke s eight primary care physicians raised antitrust concerns because the combined entity would control eighty percent of the adult primary care physicians in the Nampa area. 14 Private plaintiffs brought suit to enjoin the merger under both federal and state antitrust laws. 15 Subsequently, the Federal Trade Commission (FTC) and the State of Idaho also sought to enjoin the merger. 16 The district court consolidated the actions and ruled in favor of the plaintiffs. 17 On appeal, the Ninth Circuit affirmed the district court s holding. 18 The St. Luke s decision is based on a changing reality in health care. The Affordable Care Act (ACA) 19 has served as the impetus toward increased health care consolidation for hospitals. 20 Acquisitions by 10. For a discussion of the development of antitrust merger case law, see generally Hillary Greene & D. Daniel Sokol, Judicial Treatment of the Antitrust Treatise, 100 IOWA L. REV (2015). 11. St. Luke s, 778 F.3d at Id. at Id. 14. Id. 15. Id. at Id. 17. Id. 18. Id. at Patient Protection and Affordable Care Act, Pub. L. No , 124 Stat. 119 (2010) (codified as amended in scattered sections of 26 and 42 U.S.C.); see also Leemore Dafny et al., Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry, 102 AM. ECON. REV (2012) (providing an economic analysis of the changing health care landscape of which the ACA is a part). 20. Robert A. Berenson et al., Unchecked Provider Clout in California Foreshadows Challenges to Health Reform, 29 HEALTH AFF. 699, 699 (2010) (warning that incentives to charge higher rates will create increased consolidation); David M. Cutler & Fiona Scott Morton, Hospitals, Market Share, and Consolidation, 310 JAMA 1964, 1964 (2013) ( A large reduction in use of inpatient care combined with the incentives in the Affordable Care Act is leading to significant consolidation in the hospital industry. ); Leemore Dafny, Hospital Industry Consolidation Still More to Come?, 370 NEW ENG. J. MED. 198, 198 (2014) ( The Affordable Care Act (ACA) has unleashed a merger frenzy, with hospitals scrambling to shore up their market positions, improve operational efficiency, and create organizations capable of managing population health. ).

6 2016] HOSPITAL MERGERS 5 hospitals of physician groups are also on the rise. 21 In 2015, health care spending was $3.1 trillion. 22 The largest portion of health care expenditure remains hospital services, at more than five percent of GDP. 23 Health care costs, therefore, are a significant policy issue and ways to reduce costs (and increase quality of care) remain critical to the U.S. economic outlook going forward. Additional consolidation is inevitable, 24 but antitrust enforcement offers no clear solutions. Getting the antitrust analysis wrong can have significant effects in hospital mergers, post-merger price increases that may be as high as forty to fifty percent of pre-merger costs. 25 We believe that health care will remain a fixture in antitrust into the foreseeable future. This is particularly true for health care mergers. Understanding St. Luke s in light of these challenges in health care suggests that the stakes in health care merger cases are significant. Courts must be more effective and sophisticated in their guidance to better shape the changing health care landscape. 26 This Article undertakes a legal and economic examination of the St. Luke s decision the type of analysis that the district court and Ninth Circuit should have taken and that we hope future courts will take when analyzing mergers in the health care sector. First, the Article addresses the question of how best to frame an acquisition of a physician group by a hospital is the merger horizontal, vertical, or potentially both? In undertaking this analysis, the Article examines the broader issue of the treatment of Accountable Care Organizations (ACOs) in antitrust law. 21. See, e.g., Caroline S. Carlin et al., The Impact of Hospital Acquisition of Physician Practices on Referral Patterns, 25 HEALTH ECON. 439 (2015) (published online by Wiley Online Library) (providing a case study of such acquisitions). 22. Tami Luhby, Health Care Spending Expected to Grow Faster, CNN MONEY (July 28, 2015, 7:36 PM), [ 23. Christopher Garmon, The Accuracy of Hospital Merger Screening Methods (FTC Bureau of Econ., Working Paper No. 326, 2015), [ 24. Paul B. Ginsburg & L. Gregory Pawlson, Seeking Lower Prices Where Providers Are Consolidated: An Examination of Market and Policy Strategies, 33 HEALTH AFF. 1067, 1067 (2014). 25. Martin Gaynor, Competition Policy in Health Care Markets: Navigating the Enforcement and Policy Maze, 33 HEALTH AFF. 1088, 1089 (2014). 26. In the area of hospital acquisitions of physician groups, for the most part, such acquisitions fall outside the reporting requirements of the Hart-Scott-Rodino Act. See 15 U.S.C. 18a (2012). Consequently, the antitrust agencies typically find out about mergers after the fact, which makes divestiture remedies more difficult given the post-merger consummation. See Dionne Lomax, A History of Evanston and Analysis of the Merger Remedy, CPI ANTITRUST CHRONICLE, May 27, 2008 (discussing the Evanston remedy).

7 6 WASHINGTON LAW REVIEW [Vol. 91:1 Vertical integration via ownership means that a hospital and its physicians are within the same ownership umbrella and fully integrated both financially and clinically. ACOs are short of full integration and as such, are a potential alternative to acquisition for hospitals and physician groups through some amount of contractual integration short of ownership. A hospital acquisition of a physician practice has implications beyond the merger context. Such a merger has repercussions more broadly on how to view issues of competitive effects in the context of ACOs. Indeed, the Ninth Circuit in St. Luke s suggested integration short of full merger as a possible alternative to an anticompetitive merger. 27 Second, the Article examines the justification for integration as a way to address countervailing power in health care, the reduction of transaction costs, and cost and quality efficiencies. Third, the Article applies the economics of these issues to merger case law generally and specifically to the St. Luke s decision. Ultimately, the Article finds the economic analysis of the Ninth Circuit lacking. Finally, the Article offers policy implications of the decision and concludes with some suggestions to improve health care antitrust analysis in practice for litigated cases to make such analysis better comport with economic principles. I. HOSPITAL ACQUISITIONS OF PHYSICIAN GROUPS: HORIZONTAL, VERTICAL, OR BOTH? Hospital acquisitions of physician groups implicate both horizontal (such as the merger of two direct competitors) 28 and vertical (such as the merger of complimentary products within the production or distribution chain) 29 issues in antitrust merger law. While there have been many litigated merger decisions based on horizontal theories of harm, there has not been a vertical merger case decided before a circuit court since and no Supreme Court vertical merger cases since As a result, the contours of what might be at stake in such a case remain relatively unclear in vertical merger cases compared to horizontal 27. Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke s Health Sys., Ltd., 778 F.3d 775, 791 n.15 (9th Cir. 2015). 28. See generally Bryan Keating & Robert D. Willig, Unilateral Effects, in 1 THE OXFORD HANDBOOK OF INTERNATIONAL ANTITRUST ECONOMICS, supra note 7, at See generally Michael A. Salinger, Vertical Mergers, in 1 THE OXFORD HANDBOOK OF INTERNATIONAL ANTITRUST ECONOMICS, supra note 7, at Alta. Gas Chems. Ltd. v. E.I. Du Pont de Nemours & Co., 826 F.2d 1235 (3d Cir. 1987); see also Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979). 31. Ford Motor Co. v. United States, 405 U.S. 562 (1972).

8 2016] HOSPITAL MERGERS 7 mergers. Unfortunately, the St. Luke s decision reached the horizontal theory of harm regarding a concentration of physician groups and did not address the vertical issues. 32 We focus on the vertical issues in both law and economics below to address the sorts of questions that the St. Luke s Ninth Circuit court should have addressed. We note that the implications of St. Luke s are not limited merely to mergers that have both horizontal and vertical elements to them. Instead, the wider implications of the decision impact ACOs more generally, a form of integration short of merger. The antitrust concern with mergers is that the combined firm will be able to raise prices or reduce quality or innovation unilaterally or via coordinated effects post-merger. 33 This Part examines both types of concerns in the context of hospital acquisitions of physician groups. Such acquisitions involve behavior that has both vertical and horizontal elements. The behavior is vertical in that the acquisition provides complementary services of hospitals and physicians. The horizontal element is that the hospital may already have physicians in the same specialty, which would lead to a merger of otherwise competing practices. A similar analysis can be undertaken for behavior short of merger, under ACOs. 34 This analysis of ACO behavior is important, because courts, such as the Ninth Circuit in St. Luke s, suggest that efficiencies could be achieved short of a merger, 35 which might implicate ACOs. A. Vertical Merger Law Vertical mergers often present more difficult challenges than horizontal mergers in antitrust case law. That is because, as with vertical conduct, vertical mergers are presumed to be pro-competitive due to the efficiencies that they generate. 36 The exact standards of the legal test in 32. Complaint for Preliminary and Permanent Injunction and Damages, Saint Alphonsus Med. Ctr.-Nampa, Inc. v. St. Luke s Health Sys., Ltd., Nos. 1:12-cv BLW, 1:13-CV BLW, 2014 WL , at *14 (D. Idaho Jan. 24, 2014), aff d, 778 F.3d 775 (9th Cir. 2015)), 2012 WL U.S. DEP T OF JUSTICE & FED. TRADE COMM N, HORIZONTAL MERGER GUIDELINES (2010) [hereinafter 2010 MERGER GUIDELINES], merger-review/100819hmg.pdf [ 34. For an economic analysis of ACOs, see H.E. Frech III et al., Market Power, Transaction Costs, and the Entry of Accountable Care Organizations in Health Care, 47 REV. IND. ORG. 167, (2015) (finding physician concentration by organization has marginal effect but that physician geographic concentration leads to less ACO entry). 35. St. Luke s, 2014 WL , at * Robert Pitofsky, Past, Present, and Future of Antitrust Enforcement at the Federal Trade

9 8 WASHINGTON LAW REVIEW [Vol. 91:1 case law to evaluate the effects of vertical mergers is less well developed than horizontal mergers. Indeed, the last time that the Supreme Court addressed a vertical merger case was Prior vertical merger decisions, most notably Brown Shoe Co. v. United States, 38 were written during an era in which fairness and other non-economic based concerns motivated antitrust outcomes. 39 During this era, the U.S. Department of Justice s (DOJ) 1968 Merger Guidelines also included a discussion on vertical mergers, with a viewpoint to protect competitors over competition. 40 Though case law and the DOJ Guidelines of the 1960s and 1970s incorrectly showed hostility to vertical merger policy, 41 the antitrust concern that they purportedly were based on that of foreclosure is nevertheless a credible concern in examining vertical mergers. 42 A number of more recent cases in which deals have been abandoned or conditioned suggest that there may be situations in which the concern of foreclosure could present an anti-competitive problem, as we note below. This includes where the upstream and downstream markets would be highly concentrated post-merger, and where potential inputs or where distribution channels may not be supplied to downstream rivals, as we discuss below in Part II. The government recognized the concern with the possibility of foreclosure in a vertical merger context in the 1984 Merger Guidelines, 43 although under narrow circumstances. 44 Because of a very dated set of Commission, 72 U. CHI. L. REV. 209, 218 (2005). But see JOHN KWOKA, MERGERS, MERGER CONTROL, AND REMEDIES: A RETROSPECTIVE ANALYSIS OF U.S. POLICY (2015) (suggesting that U.S. antitrust policy has been too lax in a number of vertical merger cases). 37. Ford Motor Co. v. United States, 405 U.S. 562 (1972). 38. Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962); see also FTC v. Procter & Gamble Co., 386 U.S. 568 (1967); United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586 (1957). 39. Roger D. Blair & D. Daniel Sokol, Welfare Standards in U.S. and E.U. Antitrust Enforcement, 81 FORDHAM L. REV. 2497, (2013); D. Daniel Sokol, Tensions Between Antitrust and Industrial Policy, 22 GEO. MASON L. REV. 1247, (2015). 40. U.S. DEP T OF JUSTICE, 1968 MERGER GUIDELINES 8 10 (1968), reprinted in 2 TRADE REG. REP. (CCH) 4510 (Aug. 9, 1982) [hereinafter 1968 MERGER GUIDELINES], [ B472]. 41. Greene & Sokol, supra note 10, at See generally Salinger, supra note Merger Guidelines, 49 Fed. Reg. 26,823 (June 29, 1984), [ TM5K]. 44. Id. at 26,835, 4.21.

10 2016] HOSPITAL MERGERS 9 cases, the courts have not offered much in the form of guidance of how to address efficiencies in vertical mergers. 45 However, statements by senior officials at both agencies suggest that such efficiencies play a role in vertical merger analysis. 46 The U.S. antitrust agencies have challenged vertical mergers based on a vertical foreclosure theory in recent years, causing some transactions to be modified or abandoned. These include Ticketmaster/LiveNation, 47 Google/ITA, 48 and Comcast/Time Warner, 49 among others. Similarly, the DOJ s Policy Guide to Merger Remedies addressed the potential harm of vertical mergers, noting that vertical mergers can create changed incentives and enhance the ability of the merged firm to impair the competitive process. 50 A general discussion of vertical mergers sets the stage for an application of vertical merger analysis in the context for St. Luke s. The case presented a possible framing of the vertical case in which a hospital sought to acquire an unaffiliated physician group. 51 This is what the private plaintiffs in the case alleged in their complaint. The private plaintiffs noted that, St. Luke s will gain a near monopoly share in the Nampa, Idaho market for adult primary care physician services market. It will continue its practice of foreclosing virtually all competition for the hospital admissions of the physician practices it acquires. 52 Put differently, the integration of the physicians group into St. Luke s would mean that there would be a lack of referrals to competing hospitals. Consequently, there would be a reduction in competition for both 45. See ABA, ANTITRUST LAW DEVELOPMENTS 387 n.380 (7th ed. 2013) (compiling a list of antitrust cases). 46. Id. at Competitive Impact Statement, United States v. Ticketmaster Entm t, Inc., No. 1:10-cv , 2010 WL (D.D.C. July 30, 2010), 2010 WL , case-document/file/513376/download [ 48. Competitive Impact Statement, United States v. Google, Inc., No. 1:11-cv (D.D.C. Oct. 5, 2011), 2011 WL , [ 49. Press Release, U.S. Dep t of Justice, Comcast Corporation Abandons Proposed Acquisition of Time Warner Cable After Justice Department and the Federal Communications Commission Informed Parties of Concerns (Apr. 24, 2015), [ 50. U.S. DEP T OF JUSTICE, ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES 5 (2011), [ JRLG]. 51. Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke s Health Sys., Ltd. (St. Luke s), 778 F.3d 775, (9th Cir. 2015). 52. Complaint for Preliminary and Permanent Injunction and Damages, supra note 32, at 2.

11 10 WASHINGTON LAW REVIEW [Vol. 91:1 inpatient and outpatient services. Why didn t the government bring the vertical case against St. Luke s? 53 In part, the FTC did not need to do so (unlike the private plaintiffs) because the FTC had standing to bring the case as a much more legally cautious horizontal case. 54 The FTC also benefitted from defining the market narrowly as a horizontal case. 55 Nevertheless, failing to decide the case under a vertical theory of harm (or at least plead both vertical and horizontal theories of harm in the same complaint), contributes to the lack of cases litigated on the merits of a vertical theory. The advantage to a vertical theory in St. Luke s is that we believe a consent decree would not have been possible due to the all-or-nothing nature of the hospital merger. Such a case would have offered much needed clarity in case law and vertical merger policy. The most recent Supreme Court vertical merger case is from The only recent vertical merger decided case (from 1997) is HTI Health Services, Inc. v. Quorum Health Group, Inc., 57 where the court did not find substantial foreclosure. Quorum was a private case in which a hospital unsuccessfully challenged the merger of a private hospital and two physician groups in Vicksburg, Mississippi. The plaintiff hospital brought both a horizontal theory of harm (physician services and managed care purchasing markets) and a vertical theory of harm (acute inpatient hospital services market). To be sure, there have been numerous vertical mergers challenged since 1997 but these have resulted in consents, settlements, or deals that were abandoned Salop and Culley suggest that the nature of the foreclosure (either input or customer foreclosure) was unclear. See Steven C. Salop & Daniel P. Culley, Potential Competitive Effects of Vertical Mergers: A How-To Guide for Practitioners 20 n.39 (Dec. 8, 2014), [ ( This concern [of customer foreclosure in St. Luke s] might be classified instead as input foreclosure in that the payers tend to be third-party insurance companies or managed care operators, and that the patients are inputs who are steered to one or another hospital by the doctors. Where the merging firms produce complementary products, it is often possible to categorize the foreclosure either as input or customer foreclosure. ). 54. On antitrust standing and foreclosure more generally, see Roger D. Blair & Christine A. Piette, Antitrust Injury and Standing in Foreclosure Cases, 31 J. CORP. L. 401 (2006). 55. Complaint for Permanent Injunction, FTC v. St. Luke s Health Sys., Ltd., No. 13-cv-116- BLW (D. Idaho Mar ), stlukescmpt.pdf [ 56. Ford Motor Co. v. United States, 405 U.S. 562 (1972). 57. HTI Health Servs., Inc. v. Quorum Health Grp., Inc., 960 F. Supp (S.D. Miss. 1997). 58. See Salop & Culley, supra note 53, at app.

12 2016] HOSPITAL MERGERS 11 B. Implications of Vertical Merger Analysis on ACOs 1. Vertical Integration Short of Mergers Vertical merger analysis has broader implications because antitrust analysis of vertical mergers corresponds to vertical analysis short of merger. Such analysis has been under-developed in the case law. The St. Luke s case and the issue of vertical integration implicates more than just vertical merger law. It also impacts vertical integration through financial and clinical integration via ACOs. The Ninth Circuit St. Luke s decision also suggests that courts do not understand the benefit of ACOs. ACOs contain both horizontal and vertical elements, yet the Ninth Circuit recently analyzed the merger only horizontally. 59 The court also rejected any potential efficiencies in the structure, 60 thereby casting into doubt the ability to effectively implement ACOs in the future. To provide context for ACO implications of the St. Luke s merger, this Section provides an overview of ACO competition issues. Antitrust enforcement with regard to physician practices in the modern era begins with the 1996 FTC/DOJ Statements of Antitrust Enforcement in Health Care (the Statements). 61 The Statements were written at a time of HMO growth. As such, the Statements recognized the possibility that integration that was short of a full merger between hospital and physician groups as part of clinical integration would fall under rule of reason treatment rather than per se 62 treatment that the Supreme Court in Arizona v. Maricopa County Medical Society 63 otherwise demanded. 64 In Maricopa County, the Supreme Court found a per se violation of physician controlled foundations for medical care that had fixed the maximum reimbursement rates for their members. 65 This arrangement lacked any financial integration and, as such, the relationship was viewed as a price fixing agreement and therefore per se 59. Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke s Health Sys., Ltd. (St. Luke s), 778 F.3d 775, (9th Cir. 2015). 60. Id. at U.S. DEP T OF JUSTICE & FED. TRADE COMM N, STATEMENTS OF ANTITRUST ENFORCEMENT POLICY IN HEALTH CARE (1996) [hereinafter FTC/DOJ STATEMENTS], default/files/atr/legacy/2007/08/14/0000.pdf [ 62. For a background and treatment of the per se rule and rule of reason, see, for example, Andrew I. Gavil, Moving Beyond Caricature and Characterization: The Modern Rule of Reason in Practice, 85 S. CAL. L. REV. 733, (2012) U.S. 322 (1982). 64. FTC/DOJ STATEMENTS, supra note 61, at Maricopa County, 457 U.S. at

13 12 WASHINGTON LAW REVIEW [Vol. 91:1 illegal. 66 The problem with Maricopa County is that the Court did not give sufficient attention to the possibility that clinical integration, rather than financial integration, might also create pro-competitive effects that would overcome the potential anti-competitive effects and therefore would deserve rule of reason treatment. 67 The Statements diverged from Maricopa County based on the potential efficiencies that such integration might have. 68 However, the meaning of clinical integration remained elusive. 69 The agencies first attempted to define this concept in Statements 8 and 9: Physician network joint ventures that do not involve the sharing of substantial financial risk may also involve sufficient integration to demonstrate that the venture is likely to produce significant efficiencies. Such integration can be evidenced by the network implementing an active and ongoing program to evaluate and modify practice patterns by the network s physician participants and create a high degree of interdependence and cooperation among the physicians to control costs and ensure quality. This program may include: (1) establishing mechanisms to monitor and control utilization of health care services that are designed to control costs and assure quality of care; (2) selectively choosing network physicians who are likely to further these efficiency objectives; and (3) the significant investment of capital, both monetary and human, in the necessary infrastructure and capability to realize the claimed efficiencies. 70 This formulation of clinical integration was quite broad, which may have been by design. 71 The Statements were not the last word in vertical 66. Id. at 357 ( [T]he fee agreements... are among independent competing entrepreneurs. They fit squarely into the horizontal price-fixing mold. ). 67. Mark R. Patterson, Justice Stevens and Market Relationships in Antitrust, 74 FORDHAM L. REV. 1809, 1821 (2006); Rocco J. De Grasse, Note, Maricopa County and the Problem of Per Se Characterization in Horizontal Price Fixing Cases, 18 VAL. U. L. REV. 1007, (1984). 68. FTC/DOJ STATEMENTS, supra note 61, at 80 ( Experience indicates that, in general, more significant efficiencies are likely to result from a physician network joint venture s substantial financial risk sharing or substantial clinical integration. However, the Agencies will consider a broad range of possible cost savings, including improved cost controls, case management and quality assurance, economies of scale, and reduced administrative or transaction costs. ). 69. Robert F. Leibenluft, Antitrust and Provider Collaborations: Where We ve Been and What Should Be Done Now, 40 J. HEALTH POL. POL Y & L. 847, (2015). 70. FTC/DOJ STATEMENTS, supra note 61, at Robert F. Leibenluft, The ACO Antitrust Policy Statement: Antitrust Enforcement Meets Regulatory Rulemaking, ANTITRUST SOURCE, Dec. 2011, at 1, 2 ( The FTC and DOJ explained that they did not wish to offer more details regarding what might constitute clinical integration out of concern that more prescriptive language might dampen innovation. Officials of these antitrust

14 2016] HOSPITAL MERGERS 13 integration, however. The FTC staff started to offer advisory opinions as to the application of the Statements ACO Policy Statement The antitrust agencies have offered more recent guidance on vertical relations short of merger. To encourage increased competition through the ACA, the DOJ Antitrust Division and the FTC issued a Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (ACO Policy Statement). 73 ACOs create the potential for great benefit in the health care system. However, ACOs also create potential for anti-competitive harms including higher prices and/or lower quality. 74 Consequently, the antitrust agencies set out ACO Guidelines to assist ACOs in navigating a path that leads to increased consumer welfare. This analysis addresses many of the issues that emerge in integration via merger between a hospital and physician group. a. ACO Policy Statement Background DOJ and FTC offered the ACO Policy Statement to provide greater antitrust clarity regarding ACO formation. The ACO Policy Statement is premised on ACOs ability to promote greater efficiencies through higher quality of service and lower cost between hospitals (upstream) and physician groups (downstream). 75 As a matter of design, the implementation of ACO Guidelines does not live up to its promise. Consequently, we believe that rather than vertically integrate via contract, firms will choose to do so via merger. Firms will do so because firms will choose the greater certainty of vertical integration via acquisition because the complexities of clinical integration through ACOs outweigh the value of it. The goal of ACOs is to provide lower-cost health care with better agencies feared that providers might feel constrained to using arrangements that closely followed whatever model the guidelines would describe, at the expense of developing their own approaches better suited to meet their particular needs. ). 72. Id. at Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program, 76 Fed. Reg. 67,026 (Oct. 28, 2011). 74. Richard M. Scheffler, Accountable Care Organizations: Integrated Care Meets Market Power, 40 J. HEALTH POL. POL Y & L. 639, (2015). 75. See Statement of Antitrust Enforcement Policy, 76 Fed. Reg. at 67,026 (noting that ACOs provide opportunities for innovation in health care and corresponding benefits to consumers).

15 14 WASHINGTON LAW REVIEW [Vol. 91:1 quality. 76 Implementation issues for ACOs have been difficult such that reaching this goal has not been easy. 77 Under the Affordable Care Act, incentives have been set up under the Medicare Shared Savings Program (MSSP) to reward improved pay to the ACOs for improved performance. 78 Under the ACA, ACOs have been tasked with development of efficiencies in Medicare. 79 Under the MSSP program, according to Professor Greaney, ACOs constitute an intermediary model for reform that does not require providers to assume insurance and technical risk for care provided to beneficiaries but still provides financial incentives to reorient delivery arrangements. 80 b. Antitrust Analysis of the ACO Policy Statement The FTC and DOJ issued the ACO Policy Statement in October The Statement created safety zones for ACOs that operate as safe harbors situations in which the presumptive anti-competitive harm that would run afoul of antitrust law is unlikely. 82 ACO participants who provide a common service and have a combined market share of thirty percent of each common service in each participant s Primary Service Area fall within the safety zone. 83 Clinical integration standards are set not by the antitrust agencies but instead by the Centers for Medicare and Medicaid Services (CMS). 84 Do the pro-competitive restraints outweigh the anti-competitive effects? The question with ACOs is whether or not there is efficiencyenhancing integration. If there is, the ACO will escape per se analysis under Maricopa County. 85 In essence, the antitrust agencies offer rule of reason treatment if ACOs: (1) meet the CMS eligibility requirements; (2) participate in the MSSP; and (3) use with commercial plans the same governance, leadership structure, and clinical and administrative 76. Thomas L. Greaney, Regulators as Market Makers: Accountable Care Organizations and Competition Policy, 46 ARIZ. ST. L.J. 1, 1 (2014). 77. Id. (calling implementation a wrenching process ). 78. Patient Protection and Affordable Care Act, Pub. L. No , 3022, 124 Stat. 119, 395 (2010) (codified at 42 U.S.C. 1395jjj (2012)). 79. Id. 80. Greaney, supra note 76, at Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program, 76 Fed. Reg. 67,026 (Oct. 28, 2011). 82. Id. at 67, Id. 84. Id. at 67, Arizona v. Maricopa Cty. Med. Soc y, 457 U.S. 332 (1982).

16 2016] HOSPITAL MERGERS 15 processes that they use under the MSSP. 86 The final ACO Policy Statement does not provide sufficient clarity on the issue of how best to clinically integrate in a way that leads to lower cost and better quality while complying with antitrust law. 87 The most recent ACO statement merely notes, [c]linical integration can be evidenced by the joint venture implementing an active and ongoing program to evaluate and modify practice patterns by the venture s providers and to create a high degree of interdependence and cooperation among the providers to control costs and ensure quality. 88 Unfortunately, the ACO Guidelines also go on to say that the determination of clinical integration will be on a case-by-case basis. 89 This adds to the uncertainty of clinical integration. 90 This uncertainty can push hospitals toward a decision to integrate via merger rather than through contractual integration, particularly in small acquisitions that might not be detected due to being below the HSR reporting threshold 91 or because the creeping acquisitions are in less concentrated markets. Consequently, there has not been as much certainty regarding ACOs as hospitals interested in ACO development might want. Thus far there has only been one advisory opinion request issued by the FTC since the introduction of the ACO Policy Statement. 92 Yet, more ACOs are in 86. Leibenluft, supra note 71, at Id. at 7 (noting [t]he ACO Antitrust Policy Statement takes a much more mechanistic, almost regulatory, approach ). 88. Statement of Antitrust Enforcement Policy, 76 Fed. Reg. at 67, Id. 90. Lawrence P. Casalino, The Federal Trade Commission, Clinical Integration, and the Organization of Physician Networks, 31 J. HEALTH POL. POL Y & L. 569, 579 (2006); Thomas L. Greaney, The Tangled Web: Integration, Exclusivity, and Market Power in Provider Contracting, 14 HOUS. J. HEALTH L. & POL Y 59, 69 (2014). 91. See the Hart-Scott-Rodino Antitrust Improvements Act of , 15 U.S.C. 18a (2012), and the related Premerger Notification Rules, 16 C.F.R (2015). 92. Letter from Markus H. Meier, Assistant Dir., Bureau of Competition, FTC, to Michael E. Joseph (Feb. 13, 2013), norman-physician-hospital-organization/130213normanphoadvltr_0.pdf [ BYME]. Note, however, that there were advisory opinions prior to the Policy Statement. See Letter from Jeffrey W. Brennan, Assistant Dir., Bureau of Competition, FTC, to John J. Miles (Feb. 19, 2002), [ Letter from David R. Pender, Acting Assistant Dir., Bureau of Competition, FTC, to Clifton E. Johnson & William H. Thompson (Mar. 28, 2006), suburbanhealthorganizationstaffadvisoryopinion pdf [ Letter from Markus H. Meier, Assistant Dir., Bureau of Competition, FTC, to Christi J. Braun & John J. Miles (Sept. 17, 2007), [ UHV3]; Letter from Markus H. Meier, Assistant Dir., Bureau of Competition, FTC, to Christi J.

17 16 WASHINGTON LAW REVIEW [Vol. 91:1 operation, 93 which may suggest that those ACOs that are operating at the margins in terms of behavior that may be anti-competitive have not asked for advisory opinions. ACOs may also be complicated to implement in practice, which might push providers to merge rather than partially integrate through ACOs. Particularly due to opportunities to benefit from arbitrage of different reimbursement rates, ACOs may be too complex given the potential returns for providers. 94 Much remains unknown as to the pro- versus anti-competitive value of ACOs. Professor Scheffler of Berkeley explains: At present, regulators like the Federal Trade Commission and the Department of Justice are adapting existing metrics to measure the impact of the market power of ACOs. Moreover, we do not know what quality improvements to expect from ACOs or how such improvements should be measured. Is the ACO producing value for patients, and is it worth the cost? How should the value equation be measured and evaluated? Compared to what? These questions can only be addressed with ongoing research. 95 i. Research into ACOs Is Inconclusive Although ACOs are an important new innovation, there has been little academic work on the topic. The limited empirical work on ACOs suggests mixed results. 96 One issue that makes the study of ACO effectiveness difficult to measure is that what to measure is not always clear. For example, there are some limits to the ACO rules, including how they measure quality. 97 The ability of ACOs to be effective has Braun (Apr. 13, 2009), [ 93. We note that there had been over 700 ACOs created by the end of Deborah L. Feinstein et al., Accountable Trust Organizations and Antitrust Enforcement: Promoting Competition and Innovation, 40 J. HEALTH POL. POL Y & L. 875, 884 (2015). However, the merger wave in health care has been equally significant during this period in terms of hospital-to-hospital mergers and hospital acquisitions of physician groups. 94. Melanie Evans, Few Medicare ACOs Earned Bonuses in 2014, MOD. HEALTHCARE (Aug. 25, 2015), [ ( Three out of four Medicare accountable care organizations did not slow health spending enough to earn bonuses last year, a continuation of mixed results for an initiative that federal officials have targeted for rapid expansion. ). 95. Scheffler, supra note 74, at Gail R. Wilensky, Lessons from the Physician Group Practice Demonstration A Sobering Reflection, 365 NEW ENG. J. MED. 1659, 1659 (2011). 97. James M. DuPree et al., Attention to Surgeons and Surgical Care Is Largely Missing from Early Medicare Accountable Care Organizations, 33 HEALTH AFF. 972, 973 (2014) ( Notably,

18 2016] HOSPITAL MERGERS 17 been questioned based in the theoretical economics literature through formal modeling. As a recent working paper by Frandsen and Rebitzer concludes, Our estimates suggest that even minimally sized ACOs with modest cost reduction targets will generally not be self-financing unless extremely large economies of scale or productivity improvements accompany ACOs. 98 To create large economies of scale to make ACOs workable, therefore, requires some amount of market power. Yet, it is precisely the sort of market power that scale provides that creates the dilemma for antitrust risk exposure. ii. Policy Implications The lack of clarity in the ACO Final Policy Statement and difficulty of implementation has important policy consequences with regard to ACOs and antitrust mergers. We believe, based on our conversations with numerous health care providers, that the lack of clarity has increased the desire for health provider consolidation through the acquisition of physician groups. Rather than risk antitrust exposure through the implementation of ACOs (in a way that would maximize their value), a number of hospitals have gone about vertically integrating via merger with physician practices. 99 Such hospitals have done so as a way to address productivity and scale through merger. These hospitals have done so with small acquisitions as a deliberate way to fly under the radar of federal and state antitrust agencies because such transactions fall under HSR reporting requirements. 100 When courts, such as the one in St. Luke s, suggest that efficiencies could have been effectuated under circumstances less than a merger, consolidation via none of CMS thirty-three ACO quality measures directly addresses surgery or surgical care. ). 98. Bringham Frandsen & James B. Rebitzer, Structuring Incentives Within Organizations: The Case of Accountable Care Organizations 30 (Nat l Bureau of Econ. Research, Working Paper No , 2014), [ 99. U.S. Health Services Total Deal Value for Q Rose 152%, Pointing to Renewed Deals Confidence Post-ACA Implementation, According to PwC US, PR NEWSWIRE (May 20, 2014), pointing-to-renewed-deals-confidence-post-aca-implementation-according-to-pwc-us html [ ( The current trend of physician practice acquisitions by physician practice management companies is expected to continue in the near term as specialty-based physician groups look for ways to respond to reimbursement changes and higher regulatory costs of maintaining their practices. ) See supra note 91 for the HSR rules. On the impact of hospital acquisitions of physicians, see Scott Baltic, Monopolizing Medicine: Why Hospital Consolidation May Increase Healthcare Costs, MED. ECON. (Feb. 24, 2014), economics/content/tags/hospital-employment/monopolizing-medicine-why-hospital-consolidation-?page=full [

19 18 WASHINGTON LAW REVIEW [Vol. 91:1 merger suggests that hospitals believe such consolidation faces fewer transaction costs than ACOs and that perhaps ACOs are less effective than their original promise may have suggested. C. Recent Enforcement Trends Overall, the lack of clarity as to the meaning of ACOs does not mean that the antitrust agencies have been silent as to behavior that is unambiguously anti-competitive. Certain behavior that is per se illegal remains clear because there is no integration, whether clinical or financial. This includes DOJ enforcement against an association of chiropractors in South Dakota that had an eighty percent market share in the state. 101 The chiropractors in the association did not have any financial or clinical integration but were able to raise their reimbursements from insurers through joint negotiation. As part of the settlement with DOJ, the association was prohibited from price setting and joint negotiation for its members. 102 The FTC also has been active in enforcement of per se violations. This includes a recent case against nephrologists in Puerto Rico that lacked any financial or clinical integration but participated in a group boycott against insurers that did not agree with the nephrologists demands for an increase in reimbursement rates. 103 D. Role of Transaction Cost Economics in Health Care Integration ACOs and vertical mergers also implicate a larger question of how transaction cost economics works in the health care setting. 104 Transaction cost economics suggests that there is a make or buy decision for firms firms can integrate via ownership or via contract. 105 Organizational complexity may dictate whether or not there are economies of scale or diseconomies of scale to create greater benefit to ownership rather than contract. 106 These issues emerge in health care 101. Complaint at 1, United States v. Chiropractic Assocs. of S.D., No. 4:13-cv-04030, 2013 WL (D.S.D. Sept. 3, 2013), 2013 WL Id. at * P.R. Nephrologists, 155 F.T.C. 874 (2013), 2013 WL Renee A. Stiles et al., The Logic of Transaction Cost Economics in Health Care Organization Theory, 26 HEALTH CARE MGMT. REV. 85 (2001) OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS (1975); R.H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937) [hereinafter Coase, Nature of the Firm]; R.H. Coase, The Nature of the Firm: Origin, 4 J.L. ECON. & ORG. 3 (1988) OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS,